Wealth transfer plan should target needs of each generation.

While browsing though my small mountain of files looking for column ideas, I ran across a still timely and interesting article in an old issue of Newsweek titled Darling, It’ll All Be Yours — Soon. The article explains how “the inheritance boom is quietly reshaping how we think about death.” How true.

When I began my professional practice as a CPA and lawyer in the ’50s, a millionaire was hard to find. Today, millionaires are bountiful. And when it comes to estate planning, they scurry around trying to find a professional who can lower their estate tax before they get hit by the final bus.

Robert J. Samuelson’s well-written article, like so many other articles, entertainingly explores the problem, but it offers no solutions.

Let’s set the scene for how you — whether you are parents trying to give it away tax-free or one of the kids on the receiving end — can solve the problem.

Let’s start with Mom and Dad, who have the wealth.

• Fact No. 1: You ain’t dead yet. Typical estate plans (separate wills and trusts for him and her) don’t speak until you are dead — too late to beat the tax collector.

The solutions lie in lifetime planning: A lifetime plan keeps you in control of your wealth for as long as you live, yet transfers it — including your business — to your kids and grandkids while you are alive.

• Fact No. 2: Years of experience have taught us that wealth is always passed on to the younger generations of the family. And then the younger generations step into the parents’ shoes and typically increase the family wealth. This gives the second generation an even bigger estate tax problem than the parents had.

Here’s how we solve this do-not-enrich-the-IRS estate tax problem.

Logic tells you that the children — particularly the business children — are likely to become wealthy. Usually, these children accumulate more wealth than their mom and dad — to be repeated again when the family wealth goes to the grandchildren two generations later.

Because of this generation-to-generation wealth transfer pattern, we view each generation of the family separately in terms of its special needs and objectives. But the plan should not be just for Mom and Dad; it should be a comprehensive plan for the entire family.

Following is an overview of how it’s done: keeping your wealth — every dollar of it — in your family, instead of losing it to the IRS.

You and your spouse (first generation)

Install a lifetime plan that removes wealth from your taxable estate during your life.

Use strategies like:

• A qualified personal resident trust for your residence.

• An intentionally defective trust for your business.

• A subtrust for your profit-sharing plan, rollover IRAs and similar plans.

• A family limited partnership for your other assets — typically investments like stocks, bonds and real estate.

• An irrevocable life insurance trust for insurance, probably second-to-die.

All of these strategies — and there are many others — begin their work now, while you are alive, and allow you to stay in control of your assets, including your business, for as long as you live.

Of course, we’ll dovetail your will and trust (death documents) with your lifetime plan. But when done right, your death documents just clean up what’s left. The first part of the family plan, including a business succession plan, and your wealth transfer plan are completed — tax-free — while you and your spouse are alive.

Your children (second generation)

After we complete a comprehensive plan for Mom and Dad, it is easy to project what the financial future of the kids might look like. So as soon as we finish the plan for the first generation, we start a plan for each of the kids, based on their individual assets and objectives.

Your grandchildren (third generation)

The plans for this generation are closely tied to the plans of the two older generations. Probably the most important point to keep in mind is that because of the young ages in this generation, getting the children into a tax-free environment as soon as possible is a wealth-building must.

These plans center on short-and long-term tax-advantaged strategies that fulfill lifetime needs: education, buying a house, starting a business and, if they don’t go into the family business, building a retirement fund.

Estate Tax Blog

by Irv Blackman

First and foremost, Irv Blackman is both a CPA and a lawyer. Irv is a tax guy. Stay tuned to the site by signing up for the RSS feed.

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